Delta's Grim Outlook Offers Encouragement, Too

The bad news is that people still have very little interest in flying in the middle of a pandemic. But the silver lining — for investors at least — is that at least some airlines are accepting and adapting to that reality.

Delta Air Lines Inc. said Tuesday it would add back only about 500 flights in August, down from an earlier plan to add 1,000 trips in the final leg of summer. The carrier had previously said it would likely limit its flight schedule after Labor Day amid a dearth of interest in business and international travel, but now even the nascent rebound in domestic trips is fizzling out as coronavirus cases rise across the Sun Belt. “Demand growth has largely stalled,” Chief Executive Officer Ed Bastian said in an interview with Bloomberg News’s Mary Schlangenstein. “The pace of improvement from this point is going to depend on consumers’ confidence in flying.”

Delta was the first of the major carriers to report results for the second quarter and the numbers were even uglier than expected. The company lost $2.8 billion on an adjusted basis in the period and burned through an average of $27 million of cash per day in the month of June, despite steady efforts to rein in costs. 

There’s no way to spin those kinds of numbers as a positive. Delta’s best-case scenario is to become marginally profitable again by the spring of 2021, Bastian said. That bodes poorly for the thousands of people it employs and for the thousands more working in the aerospace industry that supplies and services its planes. Indeed, while Bastian expressed optimism that the carrier could avoid more aggressive layoffs this fall after at least 15,000 workers signed up for early retirement packages, Delta's rivals have warned of drastic job cuts without a more meaningful uptick in flying. But for shareholders that have been burned repeatedly in the past by airlines' misplaced optimism, there is some comfort in carriers' hard-nosed assessment of the current environment.

“Airlines have announced intentions to put capacity back into the system faster than we’d like and there has been somewhat of a domino effect with each airline’s add-back announcement seemingly intended to outdo the last,” Vertical Research Partners analyst Darryl Genovesi wrote in a report last week. The result is that heading into this earnings season, July and August domestic capacity was set to decline by less than 50% versus a year earlier, compared with what Genovesi estimates to be a 70% decline in demand over the third quarter.

While airline shares were buoyed in early June by those capacity announcements, that simply set them up for a fall as the outbreak expanded in the U.S. and forced carriers to reconsider their plans. Delta rival United Airlines Holdings Inc. dialed back its August flight schedule last week, announcing it would operate at 35% of last year’s capacity compared with a plan announced mere days earlier to fly roughly 40% of the flights it operated a year ago. The carrier expects its schedule for the rest of the year to look similar to August, warning that any recovery in air travel will not “follow a linear path.” 
Trimming capacity is the right thing to do if demand doesn’t support it and over the longer term, it speaks to the discipline that made airlines a more interesting investment in the pre-virus times. Airlines spent the better part of the last decade swearing up and down that things had changed in the industry and that consolidation had made the fare wars that exacerbated the boom-and-bust cycle to the point of bankruptcies a thing of the past. It was enough to convince even Warren Buffett to abandon his aversion to investing in airlines. In hindsight, these arguments had a gaping, coronavirus-sized hole that scared Buffett off from the sector yet again. But it’s encouraging that even amidst the current, unprecedented crisis, some airlines haven’t entirely forgotten their recently discovered religion on capacity expansion. It’s something. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

©2020 Bloomberg L.P.

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